Researchers tackle OFC-involved bank risks

A new Telfer School study examining tax shelters and bank risk comes as business in Offshore Financial Centres, or OFCs, has quietly boomed.  

“With global cooperation on OFCs at only an exploratory stage, the total amount of wealth managed in OFCs is soaring,” said accounting professor Tiemei Li, the principal investigator in the study, which in June received an Insight Development Grant from SSHRC. In 2014, OFCs accounted for 25 per cent, or almost $198 billion, of all direct Canadian investment abroad, three times the figure in the year 2000.

More and more financial companies have opened operations in OFCs as markets have continued to globalize. According to a recent report by the IMF, most of America’s largest banks maintain subsidiaries in OFCs while the Canadian ‘Big 5’ all established subsidiaries in OFCs.

“Given that presence, one might have expected a number of studies on the impact of bank operations in these jurisdictions on bank risk-taking, and the related economic consequences,” said Li, who worked in investment banking with one of China’s largest banks for nearly 10 years before turning to academia. “When we found that the research on those questions to date is actually very limited, we were quite surprised.”

Professor Li said a chief concern is the banks’ off-the-balance-sheet activities which are conducted under loose and flexible regulations and secrecy policies via OFC subsidiaries. “Lacking the outside scrutiny of regulators, auditors and shareholders on banks’ OFC subsidiaries, it is these undertakings that are most likely to increase bank risk-taking.”

Using a large archival sample of banks operating in OFCs from 1998 to 2014 together with a control sample, the team will develop empirical research models based on prior studies to create a fuller picture of OFC-involved bank risks. They will also examine in more detail the specific OFC features likely to significantly impact bank risk-taking and corporate fraud.

The outcomes will be of particular interest to regulators, helping them design rules concerning bank risk, noted professor Li. “Similarly, for government policymakers, our work will offer evidence for enhancing global cooperation and information transparency between OFCs and non-OFC countries and jurisdictions.”